Credit Risk

Do Not Miss the Warning Signs of Insolvency!

What is the single reason most companies fail? The answer is simple: they run out of cash. When this happens, their only solution is to file for bankruptcy protection, but by then your chances of receiving your due payments are very slim. What I am about to share will help you identify the warning signs before it’s too late.


In my experience, most customers in financial trouble will manage to hide their problems, which is why you should keep yourself informed of your clients’ financial standing. This may be achieved by performing periodic credit reviews and adhering to your credit policy, which should include receiving updated financial information on a regular basis.


Part of the challenge in reading the warning signs is deciding which changes and events are significant, and which you can ignore. When evaluating your customer’s financial statements and trade credit reports, they may show deterioration in financial condition or payment performance. Other signs that aren’t as obvious are changes in company ownership or succession. While some of these changes may mean little to day-to-day operations, they may be early warning signs of insolvency.


Sometimes, the challenge is getting reliable information to assess what is happening. To succeed, you will need to enlist your sales department and show them how to identify red flags, then have them report information back. It’s critical to have the sales team on board as they generally have the most frequent interactions with customers; on the phone, by email, and face-to-face. They are the eyes and ears of credit departments as when something unusual happens, they know about it first.


If you foresee problems or are concerned about a certain client, you should tell the sales team or conduct a conversation with senior leaders in your customer’s organization (e.g., CFO, CEO, owner), to see if you can confirm what you suspect. If the customer stonewalls you and insists that nothing is amiss, you must use your credit policy tools to allow you to make the right decision. If the need arises, suspend shipments, exercise lien rights, and do what you must to recover the owed balance in collaboration with your sales department.   


If the client admits to having cash flow issues, you will have an opportunity to explore the ways in which your company could help them work their way out of trouble. Remember, the role of a credit manager is to balance risk and reward. Under the right circumstances, the reward for working with the customer can be exceptional and will justify the risks involved. Being successful in this endeavour could mean a stronger relationship with your customer and continued business for your company in the future.


It all starts with assessing whether your customer can be helped or not. If the answer is positive, work with management to make it happen. Don’t increase your risk, mitigate it by negotiating a collateral agreement that allows the customer to operate, but also protects your company’s interests as much as possible. Do not increase your exposure since the objective of your collaboration is to minimise risk. The plan you develop must adhere to this essential requirement.


Once the plan is agreed to, remember that your customer may not be able to meet commitments the way you want them to, so be mindful of this. Write down these commitments in an agreement that spells out the terms, expectations, and deadlines that work for both sides. Both parties should sign the agreement and be fully briefed on the matters at hand. Follow up with regular communication and ensure frequent updates of the financial condition of your customer. Finally, you should carry out regular internal reviews of the plan to ensure that it remains on track.


Read the signs and respond to them by coming up with an effective plan to help your clients or to mitigate your company’s risks. If you are still having difficulty implementing or understanding how to navigate through potential insolvency,reach out to the Credit Institute of Canada; we can easily put you in touch with experienced Credit Managers who can advise you.


Published under: Credit Risk
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